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New School's $353 million HQ

At the corner of Fifth Avenue and 14th Street in Manhattan, you can see higher education's ambitions reaching to the sky. The New School's 16-story University Center nears completion at a cost of $353 million.

The edifice is impressive. But would you want to hold the mortgage on it? That’s what you have, in effect, if you buy a tax-exempt bond from the New School. Before you invest in debt backed by an educational institution, think about the precarious state of this sector of the economy.

Colleges are in the midst of a debt-fueled bubble. The college bubble is not as big now as the housing bubble was five years ago, but it is much like that one in featuring a large population of buyers who are goaded by federal subsidies and tax benefits into a borrowing binge and then wake up with a hangover.

Americans are spending $400 billion a year of their own and taxpayers’ money on education beyond high school. They have racked up $1 trillion in loans, and many of them are discovering that the loans cannot be serviced with the skills acquired. Witness the anthropology majors working as baristas and the law school grads barely able to land temp assignments.

It would seem to be an overreach for universities to be adding costly real estate at a time when their customers are struggling financially. At least the New School has the excuse that it needs to build a central campus because it has never had one.

The school’s origins go back not quite a century to a research institution founded by antiestablishment intellectuals. In its present form the New School is indeed new: It is a recent amalgam of a graduate program called the New School for Social Research with two conservatory-like schools (the Parsons School of Design and the Mannes College of Music) and several less well-known entities. In 1975 the university added a liberal arts college later renamed after the education philanthropist Eugene Lang.

Credit for the university’s expansionism goes to J. Robert Kerrey, a Nebraska politician who spent a decade away from the hustings to serve as the New School president. He departed two years ago, when the big building project was underway, to be succeeded by David E. Van Zandt, formerly a law professor and dean at Northwestern.

Kerrey left behind some ill will over his pay ($3.05 million in the June 2011 fiscal year) and a pile of debt. The university owes $440 million via tax-exempt bonds issued through the New York State Dormitory Authority. That’s twice as much money as it has tucked away in its endowment.

Unlike a centuries-old Ivy League college, the New School doesn’t have a large pool of wealthy alumni to beg from; contributions to its endowment came to just $4 million in fiscal 2011. The institution’s survival hangs on its ability to get 10,800 students to pay tuition, which covers $319 million of the $382 million annual budget.

The New School and many other institutions like it face serious threats. First is the risk that students will think twice about pursuing leisurely degrees that don’t confer automatic tickets to good careers. Then comes the potential for a price war with other schools desperate to fill their classrooms. And now a technologic upheaval bears down on the industry.

A laptop does not supply the social experience of a college campus. So maybe the next generation of students will find its way to a blended degree that combines two years in classrooms with two years on the Internet. Or maybe they will reduce the debt overhang of a traditional college degree by getting a three-year B.A. in the European fashion. Either outcome suggests a college system contending with a lot of excess capacity.

President Van Zandt has given some thought to these ominous possibilities. The colleges that will struggle, he says, are the ones offering “generic degrees” or programs that “are not differentiated in some way.” Parsons, he says, has a powerful brand that puts the school in the same league with the Rhode Island School of Design and London’s Royal College of Art. Students do not come to Parsons to draw still lifes, he says. They come to learn how to design Web pages and iPads.

Alas, not all of the New School is so differentiated. A Eugene Lang diploma would be unpersuasive evidence of workplace skills to an employer who looked at the catalog and saw courses like “Foundations of Gender Studies” and “Social Justice in [the] Food System.”

The good and the bad are captured in this mixed review from a grad posting comments at Yelp:

My four years at Eugene Lang were the best years of my life (to date). It was also very expensive and I'm about eighty thousand dollars in the hole.

Will this student be able to pay off her debts? Will the New School be able to pay off its?

The word from the experts is that the New School is on solid financial ground. The university gets a very respectable A3 rating from Moody’s.

But then, the bond rating agencies didn’t see the housing crash coming.